are made for each employee and seeing to it that their investment instructions are carried out.
Government compliance testing involves annual discrimination tests to make sure that all 401(k) plans are run fairly. Highly compensated employees (those making $80,000 or more) will reap disproportionate pretax benefits from a plan unless adjustments are made. “The tests are done on a percentage basis to make sure that people on the higher end are not putting away more than the lower-paid employees. If that’s found to be the case, the employer must make a voluntary 3% contribution to the lower-paid employees to make the plan more fair,” Boyle explains.
Operations also involves explaining to employees that they can access their account information via a 24-hour phone system or the Internet.
- Investment options. Your employee benefits planning committee will have the task of selecting the investment vehicles your employees will have to choose from. Most firms offer a choice of mutual funds ranging from aggressive growth funds to fixed-income investments. You’ll be asked to select from the choices your plan administrator offers, so make sure the funds are capable of meeting the investment objectives of the majority of your employees. Keep in mind you will be limited in your options based on the plan. Some firms, such as Merrill Lynch, offer employees the option of a stock trading account, where they can make their own stock purchases.
- Education. Employers are responsible for keeping employees informed about their investments, the tax consequences and benefits associated with their investment options and the sound principles of financial planning. The plan administrator you choose will play a major role in providing this information to your 401(k) plan participants. Your employee benefits planning committee will have to determine how skilled your administrator will be at providing such information, and then set up a schedule of meetings where the administrator can answer the plan members’ questions.
Once you and your plan administrator have agreed on how each of the aforementioned areas will be handled, you should have a 401(k) plan strategy you can be proud of.
Business owners will find that most companies that administer 401(k) plans will offer some type of package that seeks to incorporate all of these areas into an effective strategy. For example, Union Bank offers Select Benefit, which provides a bundled program in which the bank administers and runs the plan, and educates employees about the benefits of 401(k) plans.
Brokerage firms such as Merrill Lynch offer similar programs, but they also have regular investment advisors available for any employee whose company has a 401(k) plan with their firm. As with any investment, when formulating your 401(k) strategy, do your homework and make choices that are in line with your objectives.
For more information on 401(k) plans, contact: The Institute of Management and Administration, 212-244-0360, or visit www.ioma.com; the Profit Sharing/401(k) Council of America, 312-441-8550, or www.401k.org; or the 401k Forum, www.401kforum.com.
Check These Books Out:
401(k) Plans: A Comprehensive Planning and Compliance Guide
By Michael E. Lloyd et al
John Wiley & Sons, $115